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In my last Healthcare blog I argued that because of the structure of our payment system, the network effects of the providers, and reimbursement rules healthcare isn’t a free market. I believe that the exchanges in the Affordable Care Act aka Obamacare, actually offer a path forward that may take us closer to a freer market for healthcare than anything we currently have.

First I need to say that they are not an immediate silver bullet the exchanges only offer a way forward and do not guarantee any changes in the market. Furthermore, if the exchanges do provide the changes I’d like to see it will take time, several years in fact, for those changes to have a broader impact on the market.

What are the exchanges? They are essentially a market place where a customer can select a type of insurance with a specific network that meets their needs. How is this different than what we have had in the past? Well, typically health insurance has been only offered through your employer and you get what they offer. If you don’t have a full time job, you’re basically out of luck and paying a huge monthly premium. The exchanges level that playing field by increasing the pool of people that will be using those types of insurance and allowing across state competition for health insurance. For example, there’s only one Blue Cross Blue Shield provider across all the exchanges in the US. That’s a pretty big change.

Because there is competition based on meeting the needs of the customers there will be much faster feedback to the “plans” as they are called. If members don’t like a specific offering, they won’t make any money and the next year will be forced to make a different offering to attract more members. Furthermore, there will be switching across the plans as people realize they dislike certain features. I believe this will happen for several years until a “dominate” plan design emerges based on the success of those plans. Healthier members, low turn over, and acceptable level of revenues for the insurers. Expect these metrics to be similar to the mobile industry in the US (ARPU, Churn, etc..).

Because of the relatively fast feedback on the products in the market and the possibility to have at least three offerings on the exchange (Gold, silver, bronze), insurers can experiment with different types of plans and benefits. The most popular one at this point is something called Accountable Care Organization, which is somewhat similar to an HMO, but is supposed to be better (we’ll see). ACOs as they are called will have to keep track of the overall quality and re-admission rates with a goal of continually driving up quality of care and reduce re-admissions. Additionally, these are narrower networks of care than a traditional PPO that most people have become accustom to.

That’s fine, but that doesn’t really help with the fact that it’s a networked economy and that there’s still a huge imbalance of knowledge. Well, here’s where the insurers can changes things up. Instead of focusing on the narrow set of providers in their region, they can look to create a network based upon the specific of the member’s conditions and have those members go to the specialty providers that offer the best care for those conditions. Even if they are out of state or out of the country.

Granted this data is a bit out of date, however it’s likely to be accurate, according to the Innovator’s Prescription (pg 96) there are facilities that have become so specialized in certain conditions (hernia repair) that their cost to treat those conditions is $2,300 while a general hospital costs an average of $7,000 and has a much lower re-admission rate than the general hospital. With this in mind an insurer could use these specialty clinics and even fly their members to receive treatment and still save money.

This would dramatically change the shape of the network for the members of those insurers and improve overall care and results. It would also dramatically change the interaction with providers in the member’s region as well. Some hospitals are already feeling the pain in this such as Seattle’s Children’s Hospital (which is suing over being excluded).

I don’t think being exclusive it the right direction, I think creating a strong partnership with members through health coaching and care management can help drive better results and education between the provider, insurance company, and member.

This will require continual experimentation with the types of networks, the way the insurance companies interact with their members to take it from a confrontational interaction (from the member’s perspective), and how the providers plan to engage with insurers. There needs to be incentives to encourage providers to recommend non-traditional recommendations. Incentives to support healthy living for the members. Only experimentation in all of these areas can inform the insurers how to engage better to dramatically improve the health and reduce the cost of our nation.

There are many stories in business today about how companies decide not to purchase a company that has since gone on to be a market defining company. Yahoo! is one of the worst offenders. Yahoo managed to turn down both Google and Reddit both in very different ways. In the case of Google, Yahoo realized their mistake and tried to buy Google and then Google turned Yahoo down.

A company like Yahoo is in a tough spot when approached by a novel company that’s trying to compete in a market that Yahoo doesn’t really understand. Although, this isn’t really the case with Google, but Yahoo was much more confident in the technology they knew as their search platform and didn’t understand the potential ad growth that Google was eventually able to deliver.

Reddit, according to Alexis Ohanian and his book Without their permission, an executive at Yahoo told him that reddit was a rounding error to Yahoo’s web traffic. Which so greatly insulted Ohanian that he has used this as a motivational statement to this day.

Eventually Google IPO’d while reddit was bought by Condé Nast media. I believe that because of the direction of management that these companies were both able to flourish to this day. Google is obviously, one of the largest companies in the world, while reddit has become a huge community that the members still feel as if they are in a special club no one knows about.

It is likely that if either company had been acquired and managed in a different way, we wouldn’t have the same internet we have today. Condé Nast essentially left reddit alone and has only started to push the company to become profitable – 7 years after they were bought. It was only 3 years ago they introduced reddit gold and within the last few months they included a daily target for profitability using reddit Gold. In that time reddit has exploded in user base and introduced features to increase user base and interest in the site. If you’re interested in reading more about the history of reddit Randal Olson has an amazing analysis here, it’s really interesting.

On the other hand, Google has gone on to create an amazing ecosystem in Android, Chrome, Glass, the web, and so on. They have shut down more heavily used platforms than most companies create. None of this would have happened if Yahoo had bought Google, because Yahoo doesn’t or at least didn’t think that way.

Yahoo has two fairly large social platforms, Tumblr and Flickr, and is looking to acquire imgur. Acquiring Imgur is essentially admitting defeat with Flickr, as imgur was designed to make sharing photos on reddit easier, and Flickr is horrible to share photos with on reddit. So, it’s likely Yahoo will survive and possibly thrive in the future, but why did it miss out on yesterday’s internet of the future?

Missing out

I believe that these decisions aren’t because of bad managers. In fact, it’s likely because of high quality “traditional” management. While the internet was evolving companies like Yahoo developed metrics like views, clicks, and click throughs, to measure success of a website and the growth of a platforms. As Yahoo is a platform, being approached by other potential non-compatible platforms that were smaller was something to be expected. It is likely that Yahoo turned down hundreds of other unsuccessful platforms along with Google and reddit.

Yahoo wasn’t able to understand the potential of these different platforms, because their metrics were different than Yahoo’s. Yahoo was likely looking at both volume and number of clicks within the platform, while both reddit and Google’s engagement model focused more on sending users to other websites while minimally keeping the users on their platform. However, because of the content the users would continually come back.

Using the innovator’s dilemma as a lens here, we see that the quality of these platforms is much lower than Yahoo’s. Google’s home screen is the same as it has always been. Just Google with a search box and two buttons. Reddit on the other hand is a series of blue links with little to no ads and some arrows next to each link. Very plain and simple. Very different than Yahoo.

Furthermore, these platforms were servicing different users. Google users were searching the internet more broadly, while Yahoo was trying to both allow searching and be a one stop shop. Reddit was trying to engage with the politically active techie, which is a VERY small subset of the internet user base. Yahoo was servicing a lot of the people that had fairly recently left AOL and wanted a similar portal. It makes the internet less scary to have a platform for inexperienced users.

Measuring these platforms with the same metrics and vision of Yahoo, these would have made very bad buys and likely would have been killed off, directionally changed from the trajectory they were on and led to their success. Condé Nast essentially provided a “skunk works” area for reddit and enjoyed the clicks to the other sites that they owned that redditors also visit frequently.

It is likely that if Yahoo had bought either or both Google and reddit, the end result would not have lead to internet we have today. These platforms would have been warped into very different products that many young people would have avoided. I believe that Yahoo has learned a great deal and will likely do a better job with Tumblr and Imgur than they have with Flickr.

We are at the very beginnings of a healthcare industrial revolution. Perhaps, we’re beyond just the beginnings, we’ve seen huge leaps and bounds in diagnosis and treatment in the last 20 years. In my life time Aids has gone from being a quickly terminal disease to a disease where people are able to live relatively healthy lives which also last nearly as long as the average person. This is all without needing to have the sums of money of Magic Johnson.

This alone is something to celebrate, but there’s a lot more work to be done in easing the pain of suffering patients. Many Americans suffer from dibilitating heart diseases, which in some cases require heart transplants. Transplants are extremely risky procedures because the body can and does reject the new hearth. So, even after receiving the new heart, many patients are on immune system suppressing drugs. This increases their risk of infection and contracting other diseases, which can of course reduce the quality of life and inreases the risk of premature death due complications of the transplant. Recently, there’s been a serious break through in building a heart scaffold.

What is a heart scaffold? This is essentially a structure that allows your own cells to re-build your heart. In the case of this breakthrough, another heart had all of the specific cells that would have been rejeted by the transplant patient. The underlying structure remains because it is generic tissue that is transferrable between species. This break through allows patients to use their own stemcells and heart cells to convert the scaffolding into a function heart that is the patient’s own heart, not a transplant heart. This reduces the likelihood of rejection by the patient, eliminates the need for the immune suppressing drugs, and improves the results.

In the paragraph above, I said transferrable between species. The heart that is being used isn’t even a human heart, it’s a pig heart. This greatly increases the supply of hearts, because the number of hearts that can be transplanted is based on the number of peole willing to donate a heart and that are in good enough condition to be transplanted into another patient. We can hope for future advances for other types of organs as well.

This isn’t the only type of advancement we’re seeing along this vein. There is a pen that can draw cells on bone, and there are 3D printers that are being developed to print organs, like livers.

We live in exciting times for sciene in healthcare. We just need to figure out how to have medicare and insurers pay for the next.

Changes are afoot in the mobile industry. We’ve been seeing a sea change with how T-mobile looks at their customers. They’ve been changing the contracts and potentially even eliminating them. They’ve separated the phone payment plan from the monthly access fees which is an imortant first step in completely separating the purchase of a phone from the carrier that provides the services. This will eventually reduce the amount of junk files installed because the carriers can’t force the providers to install them. I think that the reason why the Nexus 7 isn’t on Verizon Wireless is that they are refusing to install the bloatware that the Verizon is trying to force upon Google. I think this is a good thing. Google has also filed a suit against VZW to force them to allow the Nexus 7 on their network. This is going to break the carriers power over the user. Carriers don’t want to be dump pipes for the internet. The wired and cable companies are actively fighting against this by puttng data caps on downloading content. At the same time they’ve experimented with this, the wireless providers have been much harsher. However, these caps weren’t a problem in the past. According to BGR a website that focuses on mobile issues has noted that the amount of data that wireless users has begun to regularly break the data caps. T-mobile has also offered all of their plans without datacaps. This will likely push many data users on verizon and AT&T to switch over to these networks. This will likely put more pressure on the carriers than they have experienced in over a decade. I look forward to this increase in competition especially since I refuse to go over my data caps and greatly limit the amount of data that I use over the wireless networks. I believe we’ll see some interesting changes in the future.

I think that these changes will also preclude the merger of T-mobile and sprint as the US market needs additional competition not less. I think that there will be changes in all of the companies marketing and product offerings, but likely T-mobile will be the largest winner with Sprint in second.

Digital currency is the biggest new thing on the market. It’s not a new idea at all, however the fact that someone was able to get it up and going is something new. The first time I’d heard of a cyrptocurrency and the potential impact it could have on the economy was in the Cyrptonomicon a 1999 book written by Neal Stephenson, but the idea is clearly much older than that. In fact, Paypal likely was something of a precursor itself to cryptocurrency. It filled a whole for money transferring on the internet, which was difficult in many cases. Paypal and eBay co-evolved as Paypal became the default transaction tool on the site – otherwise every seller would have needed to be able to accept credit cards. Paypal offered a safe way to transfer money directly from one account to another without messing with banks or credit card companies.

After the crash in 2007 and Paypal and other services refusing to transfer funds to Wikileaks people felt it was important to have another option. Fortunately, for those folks Bitcoin was already on the market, having been created in 2009. Bitcoin is essentially a digital version of gold in that users of the currency mine the coins and there is a set limit of 21 million Bitcoins. This has lead to a massive explosion in both awareness and usage of the currency. Currently, many locations accept Bitcoin as a currency so you can buy stuff with it.

Yesterday, Paul Krugman, wrote an op-ed arguing that Bitcoin, like gold, is a foolish standard to adhere too. Essentially, we mine gold and then bury it in a safe and never use it. According to Krugman, Keynes argued that the government should bury printed money and then let private enterprise mine the money – as it’s more desirable to allow private enterprise to spend money rather than government. However, in times where demand is low there’s no incentive for private enterprise to spend that money, unless they can spend it to pull it out of the ground. He then goes to argue that we’re essentially doing the same thing with a Bitcoin mine in Iceland.

This got me thinking a little bit last night. I’m not really sold on Bitcoin, I think that if anything it really points out that the only value in any thing is what people assign to it. Either paper currency, digital, or “precious” metals. Diamonds are artificially high in price because of a cartel. For instance, you can buy a set of lab created diamond earrings weighing in total 2.5 carats for $482 (12/24/2013) but if you were to buy two 1.25 carat diamonds to make those earrings it would put you back over $30,000. There’s a lot of diamonds out there and it’s impossible to tell the difference between lab created and those pulled out of the ground. Yet we put more “value” on the “real” diamonds from the ground. There is nothing intrinsically valuable about diamonds or gold. What both of them are though, are standards for trade, similar to the dollar and Bitcoin.

There is one cyrptocurrency that does have a more altruistic motive though. That one is called Primecoin and it’s encryption algorithm is based upon prime numbers. As the number of Primecoins increase in the market the number of prime numbers eventually discovered will increase. However, this was is mined differently from the other cryptocurrencies so it’s not as easy to switch to this cyrptocurrency. This coin does have an underlying value as every new prime number discovered typically has some sort of prize associated with it as it provides value to the mathematical and scientific communities. What they do with it from there is anyone’s guess. However, it provides value completely disconnected to it’s “value” in the market place.

Could we develop a cryptocurrency that instead of requiring increasingly complex solutions to an encryption key, but one that solves difficult problems at the same time? There are a large number of places where this would be useful such as SETI, Fold.it (folding proteins for science), and researching molecules for big Pharma. I’m sure there are many more options. However, then we take Bitcoin a digital gold and convert it into something more useful to everyone than Primecoin and potentially solve problems as well as mine usable moneys.

From the obvious department, amIright? Yes, but not for the reasons you think. Healthcare cannot and never will be a free market. There are several reasons for this that I will elaborate on here.

Healthcare consists of micro-regulation in the form of the reimbursement structure. This is an artifact of two different systems combining to make things worse. First, because the Federal Government is big and has two different programs one for Federal Employees and one of those in need Medicare/Medicaid (I’m combining them here for simplicity), there’s also the VA, but that has much less influence on healthcare. These two programs set the terms on how the government will reimburse or even pay providers for care provided. These are based on Current Procedure Terminology (CPT Codes) and not based upon your diagnosis. Essentially the government sets a price they are willing to pay for a procedure. As one of the largest market players, this influences all of the other payers (IE insurance companies). Many insurance companies use Medicare payment rates to set their own, which drives down the cost of a procedure to the point, in many cases, where it’s below the cost of the actual care. This drive providers to select more expensive and more procedures in many cases to make up the short fall. This payment model also makes it hard for new procedure methodologies to be adopted as they may not be paid for.

Healthcare is a network economy – nearly all care happens close to home. This is why groups like the ACLU argue that driving more than an hour for an abortion is an unnecessary burden on women. Because of the proximity of the majority of care (10.2 miles) this creates a local network of care based on the original provider a patient sees. When you receive a referral, there are a few different routes this can go, best doctor the the referrer knows, another doctor in the same clinic, or in the same care network (such as UPMC in Pittsburgh or Kaiser Permanente in CA). This drives an incentive to send patients within the network leading to mutual referrals or money staying within that care network even if there are better doctors for that specific patient outside of that care network. In addition to the Doctor’s network there is, of course, your insurer’s network which may be in direct conflict with the professional network that your provider has.

Imbalances of knowledge – in typical free markets there’s an assumption that everyone has the same amount of knowledge. In Healthcare, it is abundantly clear that this isn’t true. Most patients have little to no understanding of their diseases when they are first diagnosed. On the other hand, both their insurer and provider has an extensive knowledge of the disease. This limits how well the patient is able to correctly make decisions about their healthcare. It also pushes reliance to the provider whenever there is a disagreement between insurer and provider. The member can’t effectively participate in those conversations about care. Furthermore, there maybe little penalty to the patient if they fail to follow the prescribed course of care until much later where neither the insurer or provider can enforce a change of behavior to reduce costs for the entire system now through treatment rather than later when there are more complications.

These are but three cases that highlight the lack of free market mechanisms in healthcare. Even in cases where a patient wants to seek the best care it’s typically the patient’s responsibility to pay for it if it’s not with in the insurer’s network. In many cases these clinics can reduce systemic costs through lower point of care and lower likelihood of readmission after care.

Over the course of the next few weeks I will discuss Exchanges and their potential, how healthcare can be made more affordable using process improvement tools and other mechanisms. I plan on writing weekly on healthcare. If you have any topics that interest you please comment and let me know!

I’ve been thinking about how I want to structure my blog moving forward. The full time I’ve been posting, I’ve written whatever has been popping up in the news and has been really dependent on how much time I was able to spend looking at the news and thinking about what’s been going on. I’m thinking of structuring my blog so that I’m writing something about different topics. This will allow me to collect more information over the period of a week or so for a topic rather than whatever came to mind. We’ll see how it works. This is what I’m thinking and I’d like some feedback on two things, first, is this a good idea. Second, if it is then do these topics seem interesting.

Monday: Healthcare
Tuesday: Security/Politics topics
Wednesday: Technology/Policy
Thursday: Science
Friday: Kickstarter/indiegogo technology/science or some other innovation topic
Saturday: generic current events
Sunday: Reader’s choice – follow up on a topic earlier in the week or something like that